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Analysis

A major development playing out in crude - $60 in sight?

Head of Research

Nov 24, 2022

The technicals in crude continue to break down as the buyers stand aside – the 26 Sept swing low looks close to being taken out at $76.61 and a break here sees $65 come into play – it does feel like these lows will be tested, so a short bias is preferred. The fact we see crude down 4% when copper is up 1% speaks to the EU price caps as the driver, over just a China Covid and an economic/demand story.

I think it's important to look at the crude futures curve – On TradingView I have shown the difference between the continuous front month contract and August 2023 contracts (code CL1! -NYMEX: CLQ2023) – this is now eyeing inversion, having been as high as $11. 90 in October. This is a big development in the crude complex as it removes a key reason for funds/producers to hold longs for the roll down into the next contract on expiry.

What else has caused the moves on the day?

Poor liquidity – everyone watching Ger vs JAP - obviously many market ballers are off now for US Thanksgiving
EU price caps on Russian exports came in a $65 to $70, perhaps higher than consensus – not that Russia will comply and work with countries that apply such caps – but I guess the view is given the caps are higher, and Russia is selling crude at discounts of c.$20 p/b, that these caps won't affect Russia supply
The DoE Weekly Inventory data showed a 3.7m drawer in crude inventories, however, the market caught onto a 3.06m build in gasoline inventories (most since July), while distillates rose by 1.72m. I always find with the inventory report the market will see what it wants to see, but on today’s report it’s the gasoline numbers that have won out
China Covid restrictions – obviously still highly fluid but it is influential on the demand side of crude’s driver – traders seeing new mobility controls in the city of Zhengzhou and PCR testing – we watch Beijing and Shanghai as always given the record case count sweeping the country.

We gear up to the next OPEC meeting on 4 Dec, which could even more focus if price breaks $70 – we have our eyes on US payrolls then, but the OPEC meeting could drive some solid cross-asset vol.

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